Pricing natural gas value chain emissions

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Master’s degree thesis

LOG953 Petroleum Logistics

- A Scenario-based Case Study of the Norwegian Barents Sea

Lasse H. Bekken & Fredrik S. Strømme

Number of pages including this page: 113

Molde, 22.05.17

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Preface

This thesis represents the mandatory final part of our Master of Science Degree in Petroleum Logistics at Molde University College.

We would take the opportunity to thank our supervisor professor Arild Hervik for his excellent guidance and Katarina Shaton for her insight and assistance throughout the thesis.

Furthermore, we thank our families for their support.

Molde, May 2017.

Lasse H. Bekken & Fredrik S. Strømme

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Summary

The maturing of the Norwegian continental shelf has led petroleum activities moving further north to look for additional resources. The Barents Sea is expected to hold around 65% of the total undiscovered resources on the NCS, and finding good transport solutions is stated to be key for further development. Gassco has recommended to identify measures to bridge the gap between socioeconomic and project economic perspectives for the transport infrastructure and our research aims to bridge this gap by focusing on the externality associated by CO2 emissions.

The purpose of the study was to advance the understanding of the impact of carbon pricing on the emissions from future Norwegian natural gas supply from the Barents Sea to the European market. Through a carbon footprint analysis based on existing developments on the Norwegian continental shelf, we constructed hypothetical value chain scenarios to obtain the emission intensities for transporting natural from the Barents Sea to Europe. The result of the analysis showed that most emissions could be linked to power generation using turbine technology, and the fact that the gas had to be transported over great

distances. However, findings also showed that the emissions could be significantly reduced given the source of energy used for power generation in the chains. Our analysis gave a unit emission intensity of 37,004 kg CO2 per Sm³oe. on the best case scenario.

By investigating present and future carbon pricing policies in Norway and the EU we could put a price on the carbon footprints obtained in the analysis. The current carbon price the petroleum industry faced when transporting natural gas from the shelf to Europe was the summation of the Norwegian CO2-tax and the EU - emission trading scheme. For the future carbon price, several reports and publications were reviewed and a carbon price which corresponded to the recent Paris Agreement of 2015 and the global two-degree target were applied. When putting a price on the emissions, the current cost on our best case scenario yield 18,32 NOK per Sm³oe., while the two-degree carbon price gave a cost of 35,16 NOK per Sm³oe.

With the emissions being priced per ton CO2 released into the atmosphere from the value chain activities, it was a direct link between the carbon footprints and the cost the

emissions. Meaning that the value chains with the lowest carbon footprints experienced the lowest cost of emissions.

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Our findings could further highlight and strengthen four competitive advantages for the future Norwegian gas supply; (1) Long-term and robust supply to Europe; (2) Being integrated in EU with regulations and policies; (3) Most of the existing infrastructure already been paid off; And (4), a low environmental footprint compared to other providers.

Being based on future hypothetical value chain scenarios, the study does not claim to give an exact picture for the future development in the Barents Sea, but rather highlight

important elements, possibilities and key factors that can drive the development.

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List of Figures

Figure 1 Natural gas value chain ... 13

Figure 2 Map of the Norwegian continental shelf ... 24

Figure 3 DLE turbine GE LM2500+DLE ... 31

Figure 4 Graph illustrating externality and market failure... 44

Figure 5 Natural gas pipelines on the NCS ... 59

Figure 6 Value chain emission intensity ... 72

Figure 7 Illustration of a negative externality. ... 75

List of Tables

Table 1 Natural gas types and components ... 12

Table 2 Net social benefit of scenarios, both excluding and including the total cost of the externality. ... 45

Table 3 Historical CO2-tax level on the NCS ... 51

Table 4 Notation for unit emission formula. ... 57

Table 5 Category 1 value chain description. ... 60

Table 8 Value chain carbon footprint and distance. ... 71

Table 9 Value chain annual production volumes and emissions. ... 76

Table 10 Carbon prices in NOK per Sm3oe. from the value chains. ... 77

Table 11 Category 1 value chain. ... 78

Table 12 Category 2 value chain ... 79

Table 13 Category 3 value chain ... 80

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1 Introduction

It has become evident that human activity causes global warming and that the main greenhouse gas (GHG) emitting sources can be linked to electricity generation,

deforestation, agriculture and transportation, with the first and the latter being the fastest growing sources. There are still uncertainties regarding the nature and scale of the long- term effects of global warming but it has become clear that actions must be taken to avoid serious consequences. Climate change is of global importance since GHG have a global impact on the environment wherever they are emitted and actions therefore require international collaboration (Stern, 2006). The proceedings of the 2015 climate agreement in Paris established a new goal of limiting global warming to below two degrees Celsius, and to aim for only one-and-a-half degree above pre-industrial levels. The climate goal was set to represent the level of climate change that would prevent significant interference with the climate system while still ensuring sustainable food production and economic development in all participating countries. About two thirds of the available budget to maintain global warming has already been emitted into the atmosphere over the course of several decades, and current indications of increasing CO2 emissions show that global emissions must start to decline rapidly if the two-degree target ever is to be reached.

Therefore, the recent agreement aim for the globe to reach its peak of GHG emissions as soon as possible and to begin removal of the already emitted GHG no later than 2050 (Rogelj, et. al., 2016).

Considering the new global agreement, it may seem contradictory that the Norwegian government announced their 23^rd and 24^th licensing rounds, opening for increased

petroleum activities on the Norwegian continental shelf (NCS), and especially in the north.

Several blocks in the Barents Sea were included in the rounds, which is a sea area located far away from the actual consuming markets (Ministry of Petroleum and Energy, 2015, 2016). This has raised several questions regarding the transportation of the extracted hydrocarbons. Especially concerning the transport of natural gas to the European market.

The only existing transport infrastructure for natural gas in the Barents Sea is the Statoil- operated liquefied natural gas (LNG) facility located on Melkøya in Hammerfest. Here, the gas is brought to shore through upstream pipelines before being liquefied and transported by specialised LNG vessels. Looking further south on the NCS there is a well-developed network of natural gas pipelines connecting the fields to processing- and receiving

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facilities located both domestically and abroad. The ongoing discussion surrounding Norwegian natural gas transport is how to ship the resources in the Barents Sea to Europe in the best possible way. The discussion also involves whether to increase the LNG capacity at Melkøya or to expand the existing pipeline network further north. The determining factors holding back the participants coming up with a solution is the actual resource base in the Barents Sea and whether the transport infrastructure or the discoveries should be in place first (Norwegian Petroleum Directorate, 2011; Gassco, 2012, 2014).

However, the climate concerns regarding the transportation of natural gas must be considered. For LNG, there is a lot of emissions linked to all its processes in terms of liquefaction, transportation, and regasification. The LNG facility at Melkøya requires a lot of energy and is powered by a gas plant and not the domestic electricity grid (Statoil, 2001). Pipelines in general does not emit large amounts of GHG but the compressors and auxiliary equipment pushing and pulling the natural gas through are mainly driven by dedicated turbines or electricity produced by smaller gas turbine plants, which are directly linked to most of the emissions in the petroleum industry (Balcombe, Anderson, Speirs, Brandon, & Hawkes, 2017). The emissions related to the extraction and production of oil and gas constitutes a significant share of the Norwegian total of emissions, but the actual use of the hydrocarbons extracted is mostly emitted elsewhere due to combustion of final products by end-consumers. However, the emissions connected to the petroleum activities domestically represents a significant share of GHG emissions and cannot be disregarded (Gavenas, Rosendahl & Skjerpen, 2015).

Gaseous emissions into the atmosphere is considered an unavoidable part of hydrocarbon- exploration, production and processing operations. The reported figures for the members of the International Association of Oil & Gas Producers (IOGP) show that about 280 million tons of CO2 and 1,8 million tons of CH4 was emitted in 2015. The amount of energy required to extract, produce, and transport the hydrocarbons is very high and most of this demand is met by gas driven turbines out on the fields. The numbers for 2015 showed that companies on average consumed 1,4 gigajoules of energy per ton hydrocarbon produced (IOGP, 2016). If natural gas is assumed to be the main source of energy it would be the equivalent of approximately 37,6 Sm³ per ton produced.

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The premise stating that, “the complete combustion of one molecule pure methane with two molecules of pure oxygen results in one molecule of carbon dioxide gas, two molecules of water vapour, and energy in the form of heat”, supports the promotion of natural gas as a more environmentally friendly alternative compared to the other fossil fuels. However, the issue is that natural gas rarely consists of pure methane (CH4) and that the combustion takes place in air and not pure oxygen. This fact results in additional pollutants than the one molecule of carbon dioxide, such as carbon monoxide (CO) and nitrogen oxides (NOx) (Mokhatab & Poe, 2012). The European Commission (2011) have stated that natural gas will play a key role in the transition to a low carbon society. Due to the lower carbon intensity, gas is favoured over coal and when the price on carbon

emission increases, a switch from coal to gas in the power sector is predicted to occur.

Imposing a price on the emissions to air is the common mitigating measure governments use to reduce their emissions. Carbon prices are included in the United Nations (UN) adoption of the Paris Agreement (2015), where they recognise its importance for providing incentives for more mitigating measures. Mitigating tools, such as carbon prices lead to more cost-efficient structures with the polluters covering the damages they inflict (Kaufman, Obeither, & Krause, 2016). As a consequence of increased carbon pricing, Energy Information Administration (EIA) (2016) expect that natural gas will offset the capacity drop in coal (and nuclear), thus keeping the demand of natural gas in Europe steady in the years to 2040.

1.1 Relevance

Already in 1995, Doré studied the Barents Sea geology together with its petroleum

resources and commercial potential. Substantial reserves of natural gas could be proved in the Barents Sea, both on the Russian and Norwegian side. He concluded that the resources were sufficient but that economic exploitation of these was hindered by the low gas prices at the time, the distance to the market, challenging logistics, restricted drilling seasons and the overall environmental concern. In the case of Norway, he more specifically pointed towards the remoteness of the area, the climatic conditions and environmental precautions that had to be taken. Nonetheless, Doré predicted that by 2050 the Barents Sea would become a major centre for large scale oil and gas activities. In fact, the implications presented by Doré are the same challenges we are facing in the Barents Sea today, more than 20 years later.

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The maturing of the NCS with the biggest discoveries already being developed has led to petroleum activities moving further north to look for additional resources. As of 25^th April 2017, the Norwegian Petroleum Directorate (NPD) announced that the estimates of

undiscovered oil and gas resources in the Barents Sea could almost be doubled compared to previous estimates. The Barents Sea is now expected to hold around 65% of the total undiscovered resources on the NCS. Being facilitated by the Norwegian government, new areas in the Barents Sea are opened for petroleum activities and licencing rounds are frequently being held to assign operators to the most promising blocks. However, the increasing activity in the northern areas does not come without challenges. At the Barents Sea Conference of 2017, the director of NPD presented the way forward for petroleum activities in the Barents Sea. Further mapping of the area will become crucial and an intensification of data acquisition will be important to clarify the actual resource potential.

This foundation will need to be facilitated for the future Barents Sea to become a major oil- and gas province on the NCS. During 2017, a total of 15 exploration wells are planned which is a record in the area, and together with the field developments of Johan Castberg, Alta, Gohta and Wisting the activity is increasing. The statement: “If the companies are willing to collaborate to find good transport- and development solutions, the threshold would become much lower for development of new discoveries in the Barents Sea”

(Nyland, 2017), further promote increased Barents Sea petroleum activities.

For natural gas to be evacuated from the Barents Sea, there is a need for additional transportation infrastructure. Even the well-developed pipeline network in the North- and Norwegian Sea there are no existing pipeline infrastructure connected to the Barents Sea.

The northernmost pipeline connected to existing infrastructure that can be found on the shelf today is the Polarled pipeline connecting the Aasta Hansteen field to the Nyhamna processing facility. Developing connections from the Barents Sea to existing infrastructure will require heavy investments and the Norwegian transmission system operator (TSO) Gassco have called for collaboration among the industry participants. They further recommend to identify possible measures to bridge the gap between socioeconomic and project economic perspectives to be a focus area in near-term (Gassco, 2012, 2014).

Transporting natural gas is an energy intensive operation, which provide the topic for this study. Natural gas from the Barents Sea will require transportation over long distances to reach its intended market, which also may be the reason for the development of the existing LNG facility rather than pipelines. Offshore operations together with processing

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facilities account for some of the largest single points of emissions in Norway, which will be of great importance for the development of new infrastructure in the Barents Sea. As of 2016, Gassco exported more than 108 billion Sm³ natural gas through the pipeline network with an average energy consumption of 10,9 kWh per Sm³. Accounting for the emissions from the Norwegian electricity mix of 27 gram CO2 per kWh generated (Torvanger &

Ericson, 2013), a rough estimate would give a unit emission intensity of 294,3 gram CO2

per Sm³ natural gas equivalent to 294,3 kg CO2 per Sm³oe. However, most of the energy in the petroleum industry cannot be based on the Norwegian electricity mix alone because of the long distances from shore and the widespread utilisation of gas turbines for power generation (Norwegian Petroleum Directorate, Petroleum Safety Authority, Water Resources and Energy Directorate, Pollution Control Authority, 2008). This fact means that the emissions per unit will be hard to determine on a general basis and that it may vary according to where the gas is extracted, where it is delivered, and how it gets there. With the Norwegian petroleum sector being subject to both domestic carbon taxation together with the European quota system, the emissions from producing, processing and

transporting Barents Sea natural gas to the market will come at a cost (Norskpetroleum, 2017a). However, this cost is directly connected to how the value chains are configured, thus providing the development of new infrastructure the option of reducing these through energy efficient solutions. The emission cost related to petroleum activities in the Barents Sea will depend on the future price set on carbon emissions. The Intergovernmental Panel on Climate Change (IPCC) (2014a) have stated that a carbon price is an essential measure to keep global warming below 2 degrees and that the future will consist of strict carbon prices and favour energy efficient solutions. Large emission related costs might also lead to a shift in the energy markets, thus making potential infrastructure developments in the Barents Sea exposed for a market risk. Besides the questions surrounding the potential resource base, an ongoing debate is whether Europe’s gas demand will experience a drop when the impact of the Paris Agreement intensifies. For gas infrastructure to cover its investment it requires decades of profitable operations and demand. The market risk of reduced demand is therefore of high relevance for Barents Sea natural gas. Many

environmentalists suggest that to maintain the two-degree target, all fossil fuels need to be kept in the reservoirs and that clean energy sources must balance the decline (News Deeply, 2016, October 25). This will have a significant impact on the petroleum activities on the NCS and on the overall European energy mix. However, the likelihood of this scenario materialising is rather uncertain and it is predicted that fossil fuels will hold the

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majority in the energy balance for several years to come. (Energy Information Administration, 2016)

1.2 Research Objectives

The overall aim of this research is to advance the understanding of the impact of carbon pricing policies on natural gas value chains, focusing on natural gas produced in the Norwegian Barents Sea. To investigate the impact, it is necessary to understand and identify the emissions present in Norwegian natural gas value chains and more specifically the emissions occurring when transporting the gas to Europe. The development of carbon pricing combined with its influence on Norwegian natural gas transport infrastructure has not been covered in the existing literature and therefore opens for a whole new area of research.

Therefore, the drivers and barriers behind carbon pricing policies and natural gas infrastructure development is of great importance to highlight the opportunities and possible obstacles in the case of Norwegian natural gas from the Barents Sea. This research will further assess the existing carbon pricing policies that already have or will have a future impact on the Norwegian natural gas supply. The nature of the topic made it beneficial to focus on emissions from the natural gas value chain and carbon pricing as two individual subjects. First, an in-depth review of relevant literature and empirical emission data were gathered to investigate potential Norwegian natural gas value chains from the Barents Sea to Europe. Followed by the second, focusing on the development of carbon pricing policies in Norway and the EU to investigate the impact on the different value chains and the competitiveness of Norwegian gas supply. A more detailed description of research strategy and data collection methods is provided in section 1.3 Structure. Within the context of carbon pricing and emissions related to Barents Sea natural gas transport, the research objectives for the study have been set to:

1. Identify the CO2 emissions from hypothetical constructed value chains transporting natural gas from the Barents Sea to the European market.

Here we will conduct carbon footprint analysis on hypothetically constructed value chains transporting natural gas from the Barents Sea to the European market. The analysis will

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consider the unit emission intensities for various value chain scenarios transporting natural gas from the Barents Sea to the European market, including both pipeline- and LNG chains

2. Explore the effects of carbon pricing on the identified emissions from the

hypothetical value chain scenarios and investigate what an intensified carbon price will constitute regarding the cost of these.

Here we will use the identified results from the carbon footprint analysis and discuss the impact of carbon pricing and the effect of a carbon price corresponding to the two-degree target set by the Paris Agreement. This section will also link the identified carbon

footprints together with theory of carbon pricing by putting a price on the emissions from the hypothetical value chain scenarios.

3. Address the competitive advantages for Norwegian gas supply and the impact of carbon pricing on the future Norwegian natural gas to Europe.

Here we will discuss the impact of carbon pricing policies on the future position of Norwegian gas supply to the European market. This discussion will be used to show how our research contributes to strengthen the Norwegian supply to Europe related to its competitive advantages.

The research objectives presented will serve as the research questions for the study and the aim is to answer them as best we can as we go along. The main findings and results will be presented in the last three chapters: 6. Carbon Footprint Analysis, 7. Putting a Price on the Carbon Footprints, and 8. Impacts on the Norwegian Gas Supply.

1.3 Structure

This section will describe the structure of the thesis with respect to the necessary steps in solving the research objectives. Taking the context of the research into account, the thesis and investigation is structured into three main sections:

1. Carbon footprints from Norwegian natural gas value chains.

2. Putting a price on the emissions from the value chains.

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3. Investigating the impact on the competitive advantages of Norwegian gas supply.

The first part is introduced to the thesis with the purpose of estimating the emission intensities from a set of hypothetical value chains that acts as scenarios for future

Norwegian Barents Sea gas delivered to the European market. The value chain scenarios will be further described in the chapter of the carbon footprint analysis. The second and third part of the thesis is formed as a discussion of the carbon footprints obtained to address the impact of developing carbon pricing policies in Norway and Europe. The theoretical framework required to understand and grasp the underlying aspects of what is discussed through the thesis is very comprehensive and is linked to each of the three sections.

1.3.1 Data Sources

The study is based on a collection of secondary data gathered from academic, governmental and company publications and technical reports. The data used for estimating the emission intensities for the value chains included in the study is gathered from annual field specific reports submitted to the Norwegian Environmental Agency and the trade organisation Norwegian Oil and Gas Association. However, some of the data had to be extracted from impact assessments, plans for development and operations of a

petroleum deposit (PDO´s) and plans for installations and operation of facilities for transport and utilisation of petroleum (PIO´s). The actual calculations of the carbon footprints are based on the framework established by Shaton’s (2017) research. Data on carbon pricing, taxes and quotas, are gathered from Norwegian and EU documents, reports and other publications on the subject. The calculation of the cost of carbon pricing

regiments will be based on the results obtained from the value chain emission intensities and the carbon pricing policies present in Norway and the EU. The discussion will be based on the gathered literature and theoretical review conducted in the framework of the thesis. To answer the problem formulation of the impacts on the Norwegian model of gas supply, several topics needed to be investigated. Especially with respect to the resource potential and infrastructure development in the Barents Sea and the demand for Norwegian natural gas in Europe. The research design has been developed to investigate the carbon footprint of natural gas value chains together with future Norwegian and EU carbon pricing policies. The aim is to uncover the actual cost of the emissions from Norwegian

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natural gas supply and how the development of petroleum activities in the Barents Sea can be impacted by these.

1.3.2 Approach to Research

The distinction between qualitative and quantitative research is framed by the terms of whether the research consist of words or numbers, together with the use of open-ended or closed-ended questions. A combination of these is known as mixed methods research which is an approach where both qualitative and quantitative data is collected and

integrated into a distinct design. This research method has gained acceptance because of its ability to provide a more complete understanding of research problems than qualitative or quantitative methods alone (Creswell, 2014). The thesis is a mixed methods study that address the impact of carbon pricing policies on Norwegian natural gas value chains. A sequential mixed methods design is applied which is a design where first the quantitative data is gathered, treated and analysed before presenting the findings and results. Further the quantitative results are discussed in line with a comprehensive collection of qualitative data formed as a literature review and theoretical framework.

1.3.3 Research Design

A case study is a design in which the researchers develop an in-depth analysis of a case.

The case is bounded by time and activity and detailed information is gathered using a variety of data collection procedures over a sustained time-period. ((Stake1995; Yin 2009, 2012), cited in Creswell, 2014)). Our case is concerned with Norwegian gas supply to Europe, and specifically natural gas from the Barents Sea together with the continuous development of carbon pricing policies and other mitigating measures being enforced on the industry participants. The design of the thesis takes the form of a case study with the overall aim of investigating the carbon footprint of natural gas transport from fields in the Barents Sea to the European market, and the impact of carbon pricing policies on the future position of Norwegian gas supply in a greener European environmental regime. The research design and work process can therefore be summarised by the following steps:

 Comprehensive in-depth literature search and establishment of the theoretical foundation.

 Construction of value chains for Barents Sea natural gas transportation.

 Gathering of reports on emissions from field and processing facilities.

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 Creating an excel database for all emission data

 Calculating value chain carbon footprints using Shaton’s (2017) framework.

 Connecting the literature to the results of the carbon footprint analysis.

 Discussing the effect of carbon pricing policies on the carbon footprint from the value chains and their effect on future Norwegian natural gas supply to Europe.

1.3.4 Literature Reviews

Creswell (2014) defined the purpose of a literature review as a tool to help determine if a topic is worth studying and providing ways for how researchers can limit their scope to a specific area of research. A literature review serves several purposes: 1) Presenting results from other studies that are closely linked to the one being conducted. 2) Relating the specific study to larger ongoing discussions, identifying gaps in literature, and extending existing studies. And 3), indicating the importance of the study while acting as a

benchmark for its results. In our thesis, the review of literature is separated and focused on two specific topics since the research is separated into carbon footprints of Norwegian value chains and the impact of carbon pricing policies on future Norwegian gas supply.

The purpose of which our literature review serve is to help the reader understand what is to be investigated in the research and to show that existing research on the combination of these topics is extremely limited. However, it shows that the ongoing discussion related to emission mitigation measures, gas transport and climate policies has a lot of attention in the industry. The importance of our study is reflected through the lack of research on the area surrounding carbon footprints from Norwegian gas transport value chains and especially in the Barents Sea. It will also act as an extension of the research conducted by Shaton (2017) which only investigated the carbon footprints from existing value chains on the NCS.

1.3.5 Scenario Based Research

A scenario is defined by Kosow & Gaßner (2008) as a description of a possible future situation which includes the path of development that leads to that specific situation. The scenario will however not be used to give a complete description of the future but to highlight important elements of the possibilities and key factors that will drive the development. It is also stated that scenarios in fact are hypothetical structures and should not claim to fully represent reality. The hypothetical value chains that will be presented in this study can therefore be considered potential future scenarios for gas transport solutions

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for natural gas from the Barents Sea to the European. However, it is not likely that these value chains will be fully accurate nor resemble the actual future situation for the Barents Sea. Scenarios can also be used to test reliability, robustness, and effectiveness of policies (Kosow & Gaßner, 2008). Given our findings on emission intensities we can test the policies of carbon pricing with respect to the choice of pipeline or LNG technology for transportation of Barents Sea natural gas. By doing so, we can evaluate if current carbon pricing policies promote the most environmentally friendly alternative or if it experiences any shortcomings.

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2 Natural Gas

The relevant aspects of natural gas will be presented through this chapter to give an understanding of its components and value chain characteristics. This will in turn provide the reader with the necessary knowledge to grasp the rest of the thesis.

2.1 Natural Gas Value Chain

Among the fossil fuels, natural gas is the most energy efficient due to its energy saving benefits compared to oil and coal. Being used as fuel in power generation is its primary purpose, but it is also used in the residential sector, and as a source of hydrocarbon in petrochemical feedstocks and elemental sulphur for industrial chemicals. Natural gas consists of a mixture of hydrocarbon and non-hydrocarbon elements that acts as gas under atmospheric pressure. The gas can contain several hundreds of different compounds which can vary from one well to another, or even within the same reservoir. The primary

ingredient in natural gas is methane (CH4), but it can also contain larger quantities of ethane, propane, butane, and pentane. One can also find traces of hexane and heavier hydrocarbons. Usually, natural gas contains nitrogen, carbon dioxide, hydrogen sulphide as well as other sulphuric components. The natural gas can further be separated into different types depending on the proportion of hydrocarbons that are heavier than methane alone (Mokhatab & Poe, 2012).

Table 1 Natural gas types and components (Source: Gassco, 2017a).

Rich gas Dry gas LNG Wet gas LPG Condensate Methane

Ethane Propane Butanes Naphtha Condensate

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Understanding the value chain for natural gas is a comprehensive task as depicted in the figure below. The stages and length from discovery to end-use may vary significantly according to the chosen paths, as well as the correlating emissions along the various stages and processes. Therefore, this section will try to describe the natural gas operations

relevant for this study which will highlight the processes of transporting natural gas by pipelines or as LNG.

Upstream  Midstream  Downstream

Figure 1 Natural gas value chain (Source: American Petroleum Institute, 2013).

The physical value chain for offshore natural gas can be divided into the business segments of upstream, midstream, and downstream. Upstream involves exploration and production of natural gas, while midstream is concerned with processing and transmission, and downstream which covers the refining and distribution of various final products. The participants in the value chain such as shippers and traders link the upstream and

downstream business segments together by buying natural gas at the wellheads and selling to utilities and end-consumers (Weijermars, 2010). Tomasgard, Rømo, Fodstad, &

Midthun (2007) provided a general step-wise presentation of the pipeline value chain for Norwegian natural gas:

2.1.1 Production

Natural gas is produced at offshore fields where gas is extracted from reservoirs beneath the seabed. Several wells penetrate the reservoirs and gas is gathered at the offshore

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installation or subsea facility. Gas can also be gathered from other adjacent reservoirs, so- called tie-ins, before being prepared transportation.

2.1.2 Transportation

The gas is further transported through pipelines driven by compressors, which push and pull the gas through the various stages of the value chain. Pipelines can be merged together and the pressure for all pipelines must therefore be greater at the entry points than the exit points for the gas to flow in the right direction. The current network on the NCS consist of 8.200 km (Gassco, 2017b) of different pipelines. Here, the gas from different fields and of different quality are mixed in the network to meet the desired specifications. There is also a distinction between pipelines used to transport gas to processing facilities and pipelines used to transport processed gas to the market. The first can be classified as pipelines used for upstream transportation while the latter is known as dry gas- or export pipelines.

2.1.3 Processing

Natural gas from the fields may contain various contaminants that must be removed before the gas can be sold with the right specifications. Therefore, processing facilities remove the contaminants in the rich gas such as ethane, propane, and butanes. The processing operation is normally performed at onshore facilities, but can also be done at offshore installations. The separated petroleum gases (LPG) are exported by designated vessels to separate commodity markets. After processing, the remaining dry natural gas, mainly consisting of methane and some ethane, enters the transmission system and is exported to receiving terminals in Europe.

2.1.4 Storage

Storage of natural gas may be required in periods faced with over-production or low demands, but is also utilised to cope with peak-demands. The various types of natural gas storages can consist of abandoned fields, aquifers and salt caverns. These storage

alternatives are important since they provide flexibility to the value chain as they make it possible to store natural gas close to the market and to be utilized to cope with variations in demand. However, the Norwegian storage capacity for natural gas are very limited

compared to the volumes exported.

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2.1.5 Receiving Terminals

These are landing facilities for processed dry gas and the end-destination for the export pipelines. The gas is delivered to the terminals with pre-determined pressure levels and energy content which is specified by terms of delivery in contracts.

2.1.6 Distribution

Transmission lines from the receiving terminals to the buyers and end-users are part of the downstream transmission network. This part of the value chain is considered outside the scope of the Norwegian natural gas transportation system, which ends at the receiving terminals.

2.2 Liquefied Natural Gas

Natural gas in its liquid form is what we know as LNG. When cooled to temperatures below minus 160°C natural gas transforms from its gaseous form into its liquid state. LNG is a clear, transparent and odourless liquid that reduces the volume by a factor of

approximately 600 compared to its gas-form. This reduction is what allows natural gas to efficiently be stored as LNG for multiple uses and to be transported by other means than pipelines alone such as LNG carriers. In 2015, the American Petroleum Institute published a guidance document for estimating greenhouse gas emissions from LNG operations. The methods aimed to estimate GHG emissions from all LNG operations and to consider the diversity of the operations. To understand the emissions from the LNG value chain it is necessary to investigate each operation and its contribution related to emissions. The value chain for LNG consist of five interconnected stages generally known as liquefaction, storage, loading and discharge, shipping, and regasification.

2.2.1 Liquefaction

Natural gas arrives directly from fields or in some cases from initial processing before entering liquefaction plants. Prior to liquefaction, contaminants such as water, sulphur, residual CO2, and other components that may complicate the liquefaction process or be harmful to the facility must be removed. The process of liquefying natural gas consists of one or more LNG-trains that produce rich or lean LNG with respectively high or low heating values. Normally LNG is consisting of a minimum of 90% methane together with fractions of ethane, propane, and butanes. However, it is possible to obtain LNG consisting

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of 100% methane depending on the feed gas and the hydrocarbon recovery technology.

The process of liquefying the feed gas consist of several treatments followed by cooling the gas until it reaches the desired temperature for it to be stored as LNG. The emissions present in the liquefaction process is usually a combination of fuel gas combustion to generate the required power for refrigeration and electricity, heaters, flares, incinerators and other heat generating processes, venting of carbon dioxide, fugitive losses of natural gas, and fugitive losses of other gases.

2.2.2 Storage

The main task for the storage operations is to store LNG at the liquefaction facilities prior to loading and at receiving terminals prior to regasification. However, storage tanks can also be utilised in distribution systems for peak-shaving when demand is fluctuating. The tanks are double-hulled like what is known in the shipping-industry but with the space between the walls being insulated to keep the LNG refrigerated.

2.2.3 Loading and Discharge

Loading and discharge operations are undertaken at the liquefaction facilities and the receiving regasification terminals to load and discharge the LNG carriers. Specially designed loading arms transfer LNG between vessels and terminals or facilities. The LNG is kept in its liquid form during operations and all loading racks and connectors are

insulated to reduce generation of boil-off-gas (BOG) and as a safety measure throughout the operation. The loading arms are designed with a capacity that can vary between 4.000- 6.000 Sm³ LNG per hour and are usually installed in pairs or in threes. The emissions in the cargo handling operations are minimal because of the associated piping system is welded rather than flanged with low amounts of escaping gas.

2.2.4 Shipping

The LNG carriers transporting LNG from liquefaction facilities to receiving regasification terminals are double-hulled and insulated to ensure safe and reliable operations. The tanks are specially designed to maintain the temperature and pressure between minimum and maximum levels. BOG management systems are installed to manage vaporisation and safe use or disposal while in port and on voyage. Traditional LNG carriers use the BOG as fuel through installed steam turbines while supplemented by fuel oil or diesel to obtain the required propulsion power. New LNG carriers, normally larger tankers, are equipped with

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re-liquefaction plants to liquefy the BOG and transfer it back into the tanks. Rather than running on the BOG, these carriers are slow-steaming with diesel-powered propulsion systems resulting in lower cargo losses during voyages. The containment systems installed on LNG carriers can be separated into spherical-, membrane- and structural prismatic designs. Nowadays, most newbuildings are delivered with the membrane design.

The GHG emission from LNG carriers will vary according to the specific design of their propulsion- and containment systems, capacities, and rate of utilisation. Emissions are generated along all stages of the shipping operation, while sailing, berthing and de- berthing from liquefaction facility- and receiving terminal docks, and loading and discharging LNG.

2.2.5 Regasification

The main operation at the receiving regasification terminals is to transfer the LNG back to its gaseous state. The regasification unit is typically located and incorporated at the actual receiving terminal. LNG is pumped from the storage tanks either for further transportation in liquid form, or pressurised and vaporised before being transported in its gaseous state trough pipelines. The composition of the LNG received may vary according to the treatment the natural gas experienced prior to and in the liquefaction process. Therefore, processing steps after regasification may be required to obtain correct specification before export. Additional processing steps within the regasification operation may contribute to increased GHG emissions. Traditionally, most of the emissions in this operation stage can be traced to combustion processes for compressor operations and power generation.

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3 The Norwegian Continental Shelf

This chapter will present the current situation and development for natural gas on the Norwegian continental shelf together with its emissions and mitigating measures. It starts by addressing existing literature before going into the status on the shelf.

3.1 Literature Review

Aasness, Bye and Mysen (1996) explored the welfare-effects of emission taxes in Norway where they used a long-term general equilibrium model of the Norwegian economy. The model was run to generate scenarios to represent the differences of whether to implement a carbon tax or not. The objective was to investigate the relationship between gross domestic product (GDP) and the level of carbon taxation in Norway. In other words, how would an increased carbon tax on hydrocarbon production impact the Norwegian economy. The study showed that an increased carbon tax could increase the gross domestic income (GDI) even if GDP were reduced due to increased carbon taxation.

In 1999, the Centre for International Climate Research (CICERO) published a report on the development of emissions to air from the Norwegian petroleum industry while comparing it to the other domestic sectors. Potential mitigating measures with costs and effects were discussed to highlight the most promising, and the ones that led to reducing emissions at the lowest abatement costs. Results showed that power generation were the largest contributor to NOx and CO2,and that environmental agreements, taxes and quotas were favoured as mitigating measures to cope with emissions (Dragsund, Aunan, Godal, Haugom, & Holtsmark, 1999).

In 2001, a report on the environmental effects of Norwegian export of gas and gas power were presented. However, the report discussed the effects of increased gas production on the total of CO2 emissions in Western-Europe and not the specific emissions related to the gas transport itself. The results however showed that increased production could contribute to lower emissions in the short-term, while long term effects were dependent on

investments in other energy sources (Aune, Golombek, Kittelsen, & Rosendahl, 2001).

Bruvoll & Larsen (2004) analysed whether the implementation of the 1991 carbon tax resulted in a reduction of Norwegian emissions. The aim of the study was to reveal the

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driving forces behind the changes in CO2, CH4 and N2O in the period of 1990-1999 and provided an empirical conclusion of whether price-based incentives such as carbon taxes worked as a policy tool. The study concluded that despite ambitious Norwegian climate regulations and policies, the carbon tax only had a modest influence on emissions. The authors explained the modest effect with the fact that the policy was not uniformly

distributed throughout the Norwegian industrial sectors. Many energy intensive industries such as process industries, manufacturing, cement production, air and sea transport are partly or fully exempted from Norwegian carbon taxation.

In 2005, another CICERO report on climate policy instruments investigated various alternatives to be implemented in the Norwegian petroleum industry. Results showed that maintaining the CO2 tax together with the incorporation of EU-ETS quotas would not contribute to significant emission-reductions on existing facilities in the petroleum sector, though it could have an impact on new facilities being developed. Replacing the CO2 tax with the EU-ETS nor had any significant effects on reducing emissions, but large

economic consequences for the Norwegian state with a loss of 500-600 million NOK per year (Eskeland, Kasa, & Kallbekken, 2005).

Aune & Holtsmark (2008) considered if Norway would profit from an international climate agreement with an introduction of a global carbon price. Modelling showed that the substitute-effect for natural gas (rather than coal) were stronger than the direct reduction in demand, resulting in a higher producer price and increased consumption of natural gas. Since the CO2 emission intensity were lower for gas than coal, an increase in gas consumption would result in lower global emissions. However, replacing coal with natural gas would still generate significant emissions.

The future of Norwegian natural gas production was subject to the study of Søderbergh, Jakobsson, & Aleklett (2009). Their objective was to highlight the differences between projections made by the Norwegian government concerning future Norwegian gas supply and the actual volumes to be expected. The authors based their predictions and scenarios on mathematical models, using real-life parameters. The study modelled fields to generate production profiles, and undiscovered resources were included to make valid forecasts.

Their conclusion showed that Norwegian gas supply would decline by 2030, with limited potential to increase at any later point in time. The authors also stated that this would have

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negative consequences for the European security of supply and would increase their relative dependency to other gas providers.

In 2010, Fæhn, Jacobsen, & Strøm published a study that accounted for the socioeconomic costs of the Norwegian governments Climate Report for 2020 (Klimakur 2020) with the goal of reducing total domestic emissions with at least 12 million tons CO2 equivalents.

Results from macroeconomic modelling showed that a common emission rate of about 1500 NOK per ton CO2 equivalents would be required by 2020 to reach this goal. This would come at an estimated annual cost of five billion NOK when including EU-ETS obligations and the Kyoto Agreement.

The same year, a paper was presented on the re-development project of the Valhall field on the NCS which discussed the background for replacing its turbines with PFS (power-from- shore)-technology. The main factors for choosing PFS were summarised to cost

reductions, improved operational efficiency, minimising emissions and improving HSE elements. Estimates showed an annual reduction of about 300.000 ton CO2 and 250 tons of NOx which also resulted in significant savings considering the Norwegian carbon tax imposed on the shelf (Westman, Gilje, & Hyttinen, 2010).

Lundberg & Kaski (2011) investigated the emissions from the Norwegian oil and gas industry and the possible reductions of utilising PFS-technology on offshore installations.

The report also considered the challenges associated with the management regime and necessary measures to promote more PFS with the most relevant being: 1) Altering the Petroleum Act to require PFS from day one, allowing for more predictable planning for the mainland power grid and collaboration in important geographic areas. 2) Large field alterations and re-developments should be required to utilise PFS. 3) Increasing the Norwegian CO2 tax rate. And 4), establishing a climate fund like the NOx-Fund which could finance further electrification of existing fields. It was also stated that to avoid global warming exceeding the two-degree target, developed countries were required to reduce their emissions with as much as 40% leading up to 2020. In addition, mitigating measures had to be introduced in developing countries.

In 2013, a study was conducted on the climate policies in countries producing fossil fuel, in the case of Norway. The focus of the research tried to find the optimal combination of

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mitigation policies, with carbon leakage as a major factor. The calculation of costs and policy alternatives were based on Norwegian data. Results showed that a tax per ton domestic CO2 emissions and a tax per barrel of domestic oil extracted would be the optimal policy. The authors indicated that to reduce global emissions for an oil producing country such as Norway, most mitigating measures should be enforced on the supply side.

Meaning that one should try to reduce production. This showed that mitigation policies with the objective to reduce carbon emissions could affect third parties, such as the society. A price on carbon emissions would lead to shifts in the economy, and in the case of Norway impact the volume of hydrocarbons exported and in turn the social benefits of its activity (Fæhn, Hagem, Lindholt, Mæland, & Rosendahl, 2013).

In 2013, CICERO investigated if electrification of installations on the NCS would lead to reductions in CO2 emissions. A comparison was made to see if a platform utilising PFS- technology led to lower emissions than if the platform were equipped with traditional turbine technology. Results showed that if PFS-technology based on the Nordic electricity mix (100 g CO2 per kWh), the emissions would be reduced with up to 90% compared to turbines. Considering the Norwegian electricity mix alone (27 g CO2 per kWh), the reductions could be even larger (Torvanger & Ericson, 2013).

In 2014, a SINTEF research paper studied energy efficient technologies contributing to lowering the CO2 emissions at offshore installations, two of which located on the NCS.

The study focused on better and more efficient utilisation of turbine technology on the installations by recovering waste heat from the turbines and from the compressor trains used for gas exports. Results showed a potential 22% reduction of emissions and a saving of about 17 million USD considering the Norwegian CO2-tax rate and reduced fuel consumption (Mazzetti, Nekså, Walnum, & Hemmingsen, 2014).

Gavenas, Rosendahl, & Skjerpen (2015) investigated the driving forces behind the CO2

emissions related to Norwegian oil and gas production. The input for their analysis were field specific data provided by the oil and gas industry and the Environment Agency, which covers all Norwegian oil and gas production. The study consisted of linking the field data for CO2 emission with the field data concerning production levels, reservoir characteristics, and ocean depths of the different offshore fields. The objective of the research was to see if the level of emissions coincided with field characteristics, and to see

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whether the price of CO2 and oil had any impact. Findings showed that as production from a field reaches its peak and start to decline, the emissions per produced unit of oil and gas increased remarkably. The emission intensity also escalated as the amount of oil in the field reservoirs increased. The authors stated that the average emissions for 2012 on the NCS was 55 kg CO2 per ton oil equivalent. As for the sensitivity related to the price of CO2 oil and, it was stated that a high oil price provides economic incentives to develop energy intensive fields, thus increasing CO2 emissions. Concerning the effect of CO2

prices, indications showed that it would impact the overall emission intensity on the NCS, while a lower CO2 price provided less incentives to reduce the emissions which could be expected.

Heggedal & Rosendahl (2015) considered the effects of Norwegian climate actions on other countries´ emissions and international climate policies in a socioeconomic

perspective. Results showed that the direct effects of reducing domestic emissions were limited and that it did not provide any significant incentives for other countries to reduce their own emissions. This showed that it was not enough for only a few countries to engage in mitigating measures for global warming to be reduced. In other words, the mitigating measures should be introduced on a global scale with international agreements.

Most of the existing literature related to the NCS is concerned with possible mitigation measures (technology and climate policies) and their effect on the level of emissions.

Driving forces and socio economic costs of reducing the overall emissions have been touched upon by several researchers. However, it seems to be a limited amount of research covering entire Norwegian value chain emissions, from the wellhead to the market, and nothing concerning potential value chain emissions from the Barents Sea. Filling this gap will be the first objective of this research.

3.2 Status the Shelf

The overall goals for the Norwegian petroleum industry leading up towards 2030 has been set to maintain profitable and safe production on current levels. In 2020, CO2 reducing measures have been planned to commence with the aim of a reduction corresponding to 2,5 million tons CO2 equivalents per year leading up toward 2030. By 2050, the industry has an ambition to maintain its position as the most important value creator in Norway and to increase the average recovery rate from reservoirs to a minimum 60%. Simultaneously

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the industry wish to remain world leading in low CO2 emissions with development of new technologies and solutions for further reductions (Norwegian Oil and Gas Association &

Norsk Industri, 2016). All companies operating on the NCS must submit annual reports regarding their emissions embodied in the Norwegian Pollution Act and Environment Agency regulations. The operators must register all emissions from their activities on the NCS in detail each year which also include field specific emissions. The registered emissions include both planned emissions and accidental emissions from their activities.

(Norwegian Oil and Gas Association, 2016). The data from 2015 showed that emissions of GHG from petroleum activities on the NCS amounted to a total of approximately 14,2 million ton CO2 equivalents. The emissions consisted of 13,5 million tons CO2 and the remaining share originating from the release of methane (CH4). These emissions accounted for about a quarter of the total Norwegian emissions the same year. Most of the emissions in the petroleum industry is linked to the combustion of natural gas and diesel in turbines used for energy purposes for offshore installations and facilities not connected to mainland power grids (Norskpetroleum, 2017a).

The NCS cover more than two million square kilometres (2 039 951km²), meaning that it is close to six-and-a-half times bigger than the total area of mainland Norway, Svalbard and Jan Mayen combined. The Norwegian petroleum activity began in the North Sea and has gradually moved further north in the search for more extractable hydrocarbons. From the beginning of the Norwegian petroleum production in 1971, a total of 102 fields on the NCS have been in production. By the end of 2016, 80 fields were producing, of which 62 fields in the North Sea, 16 in the Norwegian Sea and two in the Barents Sea. The

production from the fields amounted to a total of 230,6 million Sm³oe. This figure is approximately 13% lower than the peak-production that was registered in 2004. The NCS is characterised by several mature fields approaching the end of their lifecycle. However, new technology prolonging lifecycles and new fields coming on stream will contribute to maintain stable production volumes for the coming years (Norskpetroleum, 2017b).

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Figure 2 Map of the Norwegian continental shelf (Source: Norwegian Petroleum Directorate, 2017).

3.2.1 The Barents Sea

The Norwegian Barents Sea spreads across 772 000 km² and is the single largest sea area on the NCS. However, only the southern area of the Barents Sea (313 000 km²) has been opened for petroleum activities and most of it is therefore still considered immature with little or no exploration. Nevertheless, the first discoveries in the Barents Sea was registered back in the 1980s and exploration have been going on for more than 30 years

(Norskpetroleum, 2017c). In 2015, the 23^rd licencing round was held by the Ministry of Petroleum and Energy (MPE) for petroleum activities on the NCS. The round consisted of 57 blocks, whereas 34 were in the all new South-East Barents Sea area and the remaining 20 in already opened areas. This came as great news for the operators as it was the first time since 1994 that the government had opened a new area on the shelf for petroleum

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activities. Already in 2016, the government invited the oil and gas companies to nominate new blocks for announcement in the 24^th licencing round which is expected to be held before the summer of 2017. The aim of the government has been to promote exploration in a step-wise fashion in new and immature areas on the NCS to uncover more extractable hydrocarbons and adding to the existing resource base (Ministry of Petroleum and Energy, 2015, 2016).

In 2011, the NPD drafted four scenarios for the future petroleum activity in the Barents Sea. The use of scenarios allowed NPD to illustrate uncertainties by providing a range of possibilities through the different scenarios. The idea was to investigate the possibilities in each given scenario with different resource potentials. By examining the scenarios, it became possible to evaluate future decision-making and production for the NCS while focusing on:

 How long Norway will continue to be a significant provider of natural gas?

 Should new areas be opened for petroleum activities?

 When should the new areas be opened?

 How should existing infrastructure be utilised?

 Will there be a need for new infrastructure (pipelines, processing facilities)?

 Should development offshore or landing-solutions be facilitated?

The scenarios were formulated as to whether the resource potential was above or below expectations and if the discoveries were large or small, and if these were clustered or scattered. The time-horizon for all scenarios led up towards 2040. In 2012, the Norwegian transmission system operator (TSO) Gassco presented a study on the future gas transport infrastructure on the NCS. This was also developed with scenarios depending on different resource potentials. The scenarios were developed with means to establish transport solutions from offshore fields to the market while still maximising value creation from the Norwegian gas resources. The resource potential was only divided into a small, medium, and large a scenario. Already in 2014, Gassco published yet another report regarding the potential for new infrastructure development in the Barents Sea for gas transport. In the report, scenarios were based on existing fields and discoveries and prospects with drilling schedule from 2014 to 2017 together with NPD´s former projections of undiscovered resources in the area. Gassco developed five resource scenarios to cover the potential

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results of short-term exploration activity in the area. These scenarios consisted of high or low resource outcomes, and several small or a few large fields.

3.2.2 Field and Infrastructure Development

Licensing rounds with applications and awards are held be the Norwegian government on a regular basis for oil and gas companies to engage in petroleum activities within

geographic areas on the NCS. Before the areas can be granted for licences the Norwegian Parliament must approve and open them for petroleum activities. This is a procedure that require impact assessments of the environmental, economic, and social effects of

petroleum activities in that area, as well as its adjacent surroundings. After the decision of which blocks to include in a licencing round has been made, the oil and gas companies are invited to apply for production licences in the specified blocks. The MPE assign groups of companies based on the received applications and appoint one company the operator for the partnership of each licence. The operator is responsible for all the activities set by the terms of each specific licence, which may vary according to requirements set by the government. The strategic interest of participating in licencing rounds include factors such as securing access to additional resources, improving presence in certain areas, entering new areas, and to exploit existing infrastructure. When a new area is opened for petroleum activities, the environmental requirements and safe operations set by the MPE act as a benchmark. The mitigation of risks related to environment and safety are considered in the overall evaluation of the licence and is included as a cost element

(Hasle, Kjellén & Haugerud, 2009).

All infrastructure developments on the NCS face strict regulations. The Norwegian

government imposes guidelines for infrastructure development and these guidelines relates to the PDOs and PIOs. The MPE in accordance with the Petroleum Act may approve a PDO and give special permits for the PIO compiled by the relevant actors. The plans conducted, forms the basis for the assessment and approval by the Government.

When infrastructure require connection to the mainland power grid, the Norwegian Water Resource and Energy Directorate (NVE), Statnett SF and local grid companies are all part of the planning process. The procedure from plan to operation include rules and

regulations, and involvement from several organisations and authorities. These are laid down in the Petroleum Regulations, the Framework Regulations and the Temporary Regulations and involves the Norwegian Petroleum Directorate (NPD), the Petroleum

Pricing natural gas value chain emissions - a scenario-based case study of the Norwegian Barents sea

Master’s degree thesis

LOG953 Petroleum Logistics